Surprise! Yahoo 'Core' May Actually Be a Good Acquisition

Yahoo has its share of troubles, but as the company’s board considers a possible sale of its core business, it may find a long line of potential suitors.

Yahoo’s board is meeting this week to discuss the possibility of selling its core assets, a source familiar with the matter confirmed to Fortune. While discussions are believed to be in the early stages, the board may ultimately decide to put its core Internet business up for sale including its media properties, e-mail, and advertising.

All that would be left of the company would be its hugely valuable stakes in China-based e-commerce giant Alibaba (BABA) and Yahoo Japan, a joint venture with Japan-based conglomerate SoftBank, along with some cash. It’s also possible, however, that Yahoo’s board will decide against a sale or may sell just a few pieces of the business.

Speculation about which companies may be interested in Yahoo is rampant. Verizon Communications (VZ) and Internet company IAC/InterActive Corp are among the potential suitors, according to The Wall Street Journal. (IACI). Private equity firms are also said to be lining up to bid.

Investors hoping for a deal sent Yahoo’s shares (YHOO) up 5% on Wednesday after news of a possible sale emerged the night before. But others have questioned whether Yahoo is really that valuable.

Critics point to Yahoo’s desire to spin-off its stake in Alibaba, which is valued at around $30 billion, as well as its stake in Yahoo Japan, valued at $8 billion, versus the company’s own market capitalization of nearly $32 billion, as proof that the core of its business is worth nothing. What’s worse, Yahoo shareholders have watched as the company’s revenue has steadily declined and its position in the Internet industry’s pecking order erode.

The truth, however, is that the company’s core Internet business is actually a cash cow that, in the right hands, could be an extremely valuable asset.

“One of the things you get access to is a billion monthly users so that helps you to cross-sell other products,” Bob Peck, an analyst SunTrust Robinson Humphrey, told Fortune in an interview. “You also get access to the advertising technology.”

John Blackledge, head of Internet industry research at Cowen, says Yahoo’s value is in the cash it generates. He estimated that in 2016, alone, Yahoo core would generate $780 million in operating profit. That’s before any buyer cut costs and hires new management. Even after taxes and other expenses, Blackledge says, Yahoo core would generate even more cash than now, like an annuity.

“There’s value in [Yahoo core] that hasn’t been understood or appreciated,” says Scott Kessler, an analyst at S&P Capital IQ. “I’m hardly saying this is a great company with tremendous growth, but this is still a powerful global brand. A lot of companies would be interested in acquiring them.”

For its part, Yahoo declined to comment about any possible sale, and, at least publicly, is committed to focus on growth. The company signed a search ad deal with Google in October, and has recently reported modest growth in its advertising business after years of mostly stagnation. In the third quarter, Yahoo’s revenue rose 7% to $1.2 billion compared to the same period last year. The company’s search and display ad revenue grew 13% and 14%, respectively, and it’s “Mavens” business (Mobile, video, native, and social advertising) saw an increase of 43% year-over-year to $422 million.

While that may not be groundbreaking performance compared with Google (GOOG) and Facebook (FB), it could attract buyers who ultimately want a steady stream of cash.

After all, it’s happened before.

Earlier this year, Verizon said that it would acquire AOL for nearly $4.4 billion. A vestige of the 1990s, AOL was in a similar position as Yahoo. It still had rather impressive ad revenue and substantial cash flow, but its business was slowly shrinking.

Indeed, Kessler says that Verizon could be actively seeking to buy Yahoo buy for all of the same reasons that lured it to AOL. The difference here, is that Yahoo may be even more attractive.

“I don’t see why people should perceive Yahoo to be different than AOL,” he says. “Yahoo is more global, and Yahoo has a stronger balance sheet than AOL did. I think there’s a lot there.”

Questions remain, though, over how much Yahoo’s core business is worth to the right buyer. Analysts surveyed by Fortune value it at anywhere from $1.9 billion and $8 billion. Most analysts, however, say that Yahoo’s core will likely fetch between $5 billion and $8 billion. The wide range is due to the differences in the way analysts value Yahoo’s stake in its Asian investments, and how much cash would remain with what’s left of the company.

Regardless, the sales price would be a far cry from the days of old when Yahoo could have fetched tens of billions more. In 2008, Microsoft (MSFT) proposed a $44.6 billion acquisition, a 62% percent premium to the company’s stock price at the time. That was before Alibaba became such a valuable asset. While the deal would have given Microsoft all of Yahoo, the differences between the Yahoo of 2008 and Yahoo’s core now are not all that different. It would have been one of the biggest technology industry acquisitions in history, and looking back, it would have given shareholders far more cash.

Yahoo ultimately rebuffed Microsoft’s offer and set its own course in hopes of a turnaround. Instead, things got worse.

Now, the board is back in the same spot, mulling a possible sale of Yahoo’s core business. The implications are major. One possibility is that Yahoo would cancel the spin off of its Alibaba shares and keep them. After selling its core Internet assets, Yahoo would essentially become a holding company for its Asian investments.

The process could take months. But as far as Kessler and other analysts Fortune spoke to are concerned, deciding against a sale against may be a grave mistake.

“There are a lot of opportunities and options,” Kessler says of Yahoo. “The time might be ripe.”

For more on Marissa Mayer and Yahoo, check out the following Fortune video: